Summary: I am a Managing Partner at Financing Solutions and we are the leading provider of Nonprofit Lines of Credit in the US. Over the last 25 years, I have built 6 companies and I have personally dealt with banks numerous times. A nonprofit line of credit can be used for a multitude of scenarios, but most often a line of credit is used to address emergencies or opportunities that can be paid back in the short term.
What Is a Line of Credit For a Nonprofit Used For?
A bank line of credit should not be used for long-term purchases like purchasing a building/property, or any real estate. Typically, lines of credit can be used in situations where cash flow is down, and you need a backup plan. In this article, I will discuss everything you need to know about getting a line of credit for your nonprofit. I will discuss the benefits of having a nonprofit line of credit, and also why Financing Solutions is better than a traditional bank line of credit. Lines of credit are typically flexible and have few rules and regulations surrounding the line of credit, depending on if you go with a private credit union or traditional bank.
Why Hasn’t Your Nonprofit Set Up a Line of Credit?
A line of credit is an amazing safety net that all nonprofits should have. Have you ever been in a situation where you quickly need cash to fix an issue? Lines of credit can be used if you need help with payroll, or maybe you have a small property malfunction and you need help financing it. If your nonprofit is looking to start a new division within your company or looking to buy a large property, a line of credit probably isn’t what you should be looking for. Anything that requires a large amount of working capital, you are going to want to look for a larger term loan or bank loan. For example, if you do a lot of community development and you need an amount of money for a project, a line of credit might not be what you are looking for.
Lines of credit are an important tool that business owners have used for decades. For nonprofits, commercial banks’ underwriting standards don’t exactly fit a nonprofit model. Traditional banks very frequently tell nonprofits “no,” so they have given up quite easily. In addition, the bank application process is lengthy. Due to the nature of a nonprofit being a nonprofit, they typically feel that any extra expense is one less dollar for their cause.
However, wise nonprofit organizations realize that a credit line can be an important emergency tool to have. Similar to a credit card, you can always use it when you are in a pinch or wish to cover quick costs. If you are thinking of delaying paying your employees until those funds come in that could be a big mistake. It is actually illegal to not pay your people on time and if the state/federal government finds out, there could be large penalties and even forced closure. On top of it being illegal to withhold funds, it isn’t the right way to treat individuals working for your nonprofit who need their paychecks.
What Will a Commercial Bank Look For To Approve Your Nonprofit Loan or Credit Line?
Most importantly to note, some banks and financial institutions will just not work with nonprofits. There are many different reasons they might say no. A major factor that has impacted 2020 is Covid-19, and banks analyze how the economy is doing when making decisions. If the economy is doing good, you are more likely to be approved for a line of credit. However, if the economy is in a recession or doing poorly, it might be very difficult to get a nonprofit line of credit.
As a nonprofit, you often have to have a long-standing relationship with a bank for approval. Banks want to see good cash flow, a good credit score, tax returns, and any financial statement or bank statement that your nonprofit organization has. At the end of the day, banks are doing to make sure they can make monthly payments on time. If you don’t have a good history with the bank, you will probably have to pledge some type of collateral (stocks, bonds, etc.) to secure your line of credit (secured line of credit). This is what the bank will use in case your nonprofit defaults and the bank need a way to get repayment. Overall, approaching a bank might make things more difficult than they have to be depending on the organization’s profile, history, and financial standing.
Lastly, the cost of setting up and maintaining a bank line of credit might be expensive. Banks typically have high interest rates, no matter if you are looking for a business loan or line of credit. Banks are also going to want a personal guarantee, which ensures your nonprofit will pay back the money. It can be a whole other can of worms to open with a bank when you need to get your personal credit score involved, and it might not be in your best interest to do so.
Why Financing Solutions Nonprofit Line of Credit is Better Than a Bank
Why should you choose Financing Solutions over a traditional bank? Nonprofit financing can get very discouraging if you are in a tricky situation and need money. Our Credit lines cost nothing to set up, nothing to set up, and are inexpensive until used. Unlike banks, our line of credit program is easy to get in place and renews yearly. Our line of credit program is so popular because when you aren’t using it, it costs nothing to have! Most lines of credit are used as a cash backup plan so they are not needed often, therefore it can’t hurt you to have it in place. Also, our Line of Credit requires no collateral and no personal guarantees. For a nonprofit, It’s not a good idea to borrow money from a donor or nonprofit board member, executive director, or other members. The IRS rules for nonprofits can create a conflict of interest, and you would need to check with your accountant.
Borrowers like nonprofit organizations commonly have cash flow issues due to nature, and if you need a cash advance, Financing Solutions is the way to go, and we don’t run a credit check nor do we have any obligations for your application. If your nonprofit organization does a lot of fundraising, you might go through periods of time where you are waiting on funds or accounts receivable. Getting your hands on a nonprofit business loan or line of credit might be more beneficial than you think. It is extremely common for nonprofits to have a line of credit ready to use. Nonprofits don’t usually think they need a line of credit for backup, but it can be very helpful.
Conclusion: Funding Options for Your Nonprofit
Whether you are looking for business financing or nonprofit financing, Financing Solutions has many perks in comparison to traditional banks. If you are looking for a more reliable source of funding for when cash flow is down, then Financing Solutions can help. Financing Solutions will work with you to create a custom source of funding that matches your business needs and provides you a safety net for meeting your obligations consistently.
Nonprofit financing can seem daunting and overwhelming at times. Especially if you are in a tough situation and need to get your hands on money fast. A line of credit can make difficult situations easier to handle. When a shortage of cash flow arises, you can always know where you are going to get your funds temporarily. The key here is to make sure you are educated on all the possible financing options for your nonprofit, and know which one is going to be the most beneficial. At the core of all these decisions, make sure to keep your mission in mind, your board members, and how all financial decisions can affect all different parts of the organization.
About Financing Solutions Line of Credit
Financing Solution’s nonprofit line of credit costs nothing to set up, nothing until used and when used, is inexpensive. The credit line requires no collateral and no personal guarantees.
Organizations will set up the line of credit in advance so that if there are ever any cash flow issues, you will have a cash back up plan. The time to set up a credit line is when you don’t need it so that it is ready to be used, just in case.
If you would like to see if your organization would-be approved and for how much, please feel free to fill out the nonprofit no-obligation, 2-minute line of credit application here.